Supreme Court Upholds Requirement Of ‘Pre-Import Condition’ To Claim IGST And GST Compensation Cess On Imports Made Under ‘Advance Authorization’

The Supreme Court has upheld the requirement of ‘pre-import condition’ incorporated in the Foreign Trade Policy of 2015-2020 (FTP) and Handbook of Procedures 2015-2020 (HBP) to claim exemption of Integrated Goods and Services Tax (IGST) and GST Compensation Cess on inputs imported into India for manufacture of export goods, on the basis of ‘Advance Authorization’.

The bench comprising Justices S. Ravindra Bhat and Dipankar Datta set aside the judgment of the Gujarat High Court where it had quashed the amending Notifications, i.e., Notification No. 33 / 2015-20 and 79 / 2017-Customs, dated 13.10.2017, by which the Director General of Foreign Trade (DGFT) had imposed the ‘pre-import’ and ‘physical export’ conditions for availing IGST and Compensation Cess exemption on imports made under ‘Advance Authorisation’.

While holding that the concept of ‘pre-import condition’ was not alien, the court observed that paragraph 4.13 (i) of the FTP itself empowered the DGFT to impose ‘pre-import conditions’ on articles other than those specified in Appendix-4J of the HBP. The bench remarked that the Gujarat High Court had failed to consider the same and had erroneously proceeded on the assumption that only the goods specified in the said Appendix were subject to the ‘pre-import condition’.

The bench remarked that the introduction of the ‘pre-import condition’ may have resulted in hardship to the exporters, since they could no longer continue with their former business practices of importing inputs, after applying for Advance Authorization, to fulfil their overseas export contractual obligations. Under the new scheme, the exporters were required to pay the IGST and Compensation Cess, and then claim refunds, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export good. However, the top court held that the same cannot be a ground to hold that the insertion of the ‘pre-import condition’ was arbitrary, as held by the High Court.

In the investigations initiated on the basis of the said Notifications, the Directorate of Revenue Intelligence (DRI) opined that the ‘pre-import condition’ meant that goods had to be imported first, and then the final products manufactured with such imported goods were to be exported. That is, only after the import of the goods commenced, were they required to be used for manufacture of export goods, which were ultimately exported.

As per the DRI officers, the ‘pre-import condition’ stood satisfied when it was established that the goods imported against a particular ‘Advance Authorisation’ were used in relation to manufacture of finished goods exported for fulfilment of export obligation of that particular authorisation.

The manufacturer-exporters challenged the amending Notifications before the Gujarat High Court, who set aside the 2017 Notifications imposing the ‘pre-import’ condition on the ground that they were ultra vires the scheme of the FTP.

In the appeal filed by the revenue department against the decision of the High Court, the Apex Court reckoned that Chapter IV of the FTP provides for “Duty Exemption/Remission Schemes”, and that ‘Advance Authorization’ (AA) is one of the duty exemption schemes.

The court took note that under the ‘Advance Authorization’ scheme, exemption from the payment of import duties is given to raw materials / inputs required for the manufacture of export products, which are then physically incorporated in such export goods. Thus, one can import raw materials or inputs at zero customs duty for production of export products.

Imports under an ‘Advance Authorization’ were exempted from the payment of Basic Customs Duty (BCD), Additional Customs Duty, Education Cess, Anti-dumping Duty, Countervailing Duty (CVD), Safeguard Duty, and Transition Product Specific Safeguard Duty, wherever applicable.

It further reckoned that Paragraph 4.27 (a) of the HBP, as notified by the DGFT, provides for “Exports in Anticipation of Authorisation”. The said provision permitted exports in anticipation of authorisation, and permits exports towards discharge of export obligation on the basis of the file number even prior to the grant of ‘Advance Authorisation’ for imports.

By the Notification No. 18/2015-Customs, dated 01.04.2015, goods imported into India against valid Advance Authorisation were exempted from the customs duty, including the additional duty, safeguard duty, transitional product specific safeguard duty, and anti-dumping duty.

After the introduction of the GST regime, as there was no corresponding notification exempting the additional duties leviable under the Customs Tariff Act, exporters had to pay IGST and compensation cess and seek input tax credit as applicable under the GST Rules. Imports under ‘Advance Authorisation’, however, continued to be exempt from payment of basic customs duty, education cess, and other duties, wherever applicable, as per the 2015 Notification.

The bench observed that because of the initial problems relating to GST, the refund of IGST got delayed, resulting in blocking of working capital for many businesses.

“The Union then issued an amending notification dated 13- 10-2017 in exercise of powers under Section 25 (1) of the Customs Act, 1962 (Notification 79/2017 - dated 13.10.2017) inter alia amending the opening paragraph of Notification 18 / 2015 (dated 1.4.2015) whereby goods imported into India were exempted from the whole of the duty of customs leviable thereon, specified in the First Schedule to the Customs Tariff Act, 1975 and from the whole of the additional duty leviable thereon under sub-sections (1), (3) and (5) of Section 3, IGST leviable thereon under sub-section (7) of section 3 and compensation cess leviable under sub-section (9) of section 3,” the court said.

The bench observed that the said amending notification also inserted the “physical export” and “pre-import” condition for availing exemption from IGST and Compensation Cess.

“Thus, exemption from levy of IGST under Section 3 (7) and compensation cess leviable under Section 3 (9) of Customs Tariff Act, 1975 were subject to the conditions that the export obligation shall be fulfilled by physical exports only and shall also be subject to ‘pre-import condition’,” said the court.

The bench further noted that by virtue of a trade notice (Trade Notice 11/2017, dated 30-06-2017), exporters were made aware of the changes.

“The public notice clearly forewarned that AAs and their utilisation would not continue in the same manner as the AA scheme was operating hitherto. This trade notice has escaped the attention of the High Court, since there is no advertence to it in the impugned order, or a discussion about it,” said the court.

It further observed that virtue of the trade notice, exporters were made aware of the fact that under the GST regime, no exemption from payment of IGST and Compensation Cess would be available for imports under ‘Advance Authorisation’. Importers had to pay IGST and take input tax credit as applicable under GST rules.

The court added: “Likewise, the HBP was amended, and paragraph 4.27 (d) was inserted, which stated that duty free authorisation for inputs subject to ‘pre-import condition’, could not be issued.”

While observing that the concept of ‘pre-import condition’ was not alien, the court held, “Appendix-4J (mentioned in paragraph 4.13 (ii) of the FTP) listed several articles, such as spices, penicillin and its salts, tea, coconut oil, silk, drugs from unregistered sources, precious metals, etc. as articles for which the ‘pre-import condition’ was applicable, prior to the GST regime.” Further, under paragraph 4.13 of the FTP, the DGFT could impose ‘pre-import conditions’ on articles other than those specified.

“The retention of the power to impose ‘pre-import conditions’ on articles other than those specified in Appendix-4J, meant that the DGFT could exercise it, in relation to any goods. The High Court has not discussed this aspect, and proceeded on the assumption that only specified goods were subject to the ‘pre-import condition’. The existence of paragraph 4.13 (i) reserving the power to insist upon the ‘pre-import condition’, meant that the policy was capable of change, depending on the exigencies of the time. This omission, together with the High Court’s failure to notice paragraph 4.27 (d) of the HBP are serious infirmities in the impugned judgment,” the court added.

The court further said that one of the objects behind the 2017 Notifications was to ensure that the entire exports made under ‘Advance Authorisation’ towards discharge of export orders were physical exports. In case the entire exports were not physical exports, the ‘Advance Authorisation’ were automatically ineligible for exemption.

The bench remarked that even though the introduction of the ‘pre-import condition’ may have resulted in hardship to the exporters, that cannot be a ground to hold that the insertion of the ‘pre-import condition’ was arbitrary.

“In this court’s opinion, the introduction of the ‘pre-import condition’ may have resulted in hardship to the exporters, because even whilst they fulfilled the physical export criteria, they could not continue with their former business practices of importing inputs, after applying for AAs (‘Advance Authorisation’), to fulfil their overseas contractual obligations. The new dispensation required them to pay the two duties, and then claim refunds, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export goods. The re-shaping of their businesses caused inconvenience to them. Yet, that cannot be a ground to hold that the insertion of the ‘pre-import condition’, was arbitrary, as the High Court concluded. It was held, in Rohitash Kumar & Ors. v Om Prakash Sharma & Ors ³¹ that inconvenience or hardship is not a ground for the court to interpret the plain language of the statute differently, to give relief.”

The bench observed that when a new set of laws are enacted, the same is bound to lead to some disruption. “In this case, the disruption is in the form of exporters needing to import inputs, pay the two duties, and claim refunds. Yet, this inconvenience is insufficient to trump the legislative choice of creating an altogether new fiscal legislation, and insisting that a section of assessees order their affairs, to be in accord with the new law. Therefore, the exclusion of benefit of imports in anticipation of AAs, and requiring payment of duties, under Sections 3 (7) and (9) of Customs Tariff Act, 1975, with the ‘pre-import condition’, cannot be characterized as arbitrary or unreasonable,” said the court.

The respondent, Cosmo Films Ltd, argued before the court that there was no reason/ intelligible differentia for subjecting IGST and Compensation Cess to the ‘pre-import condition’, and not applying the said condition for other types of import duties, including the Basic Customs Duty (BCD), to license holders under the scheme.

Dismissing the arguments of the respondent, the court remarked, “ The exporter respondents’ argument that there is no rationale for differential treatment of BCD and IGST under AA scheme is without merit. BCD is a customs levy at the point of import. At that stage, there is no question of credit. On the other hand, IGST is levied at multiple points (including at the stage of import) and input credit gets into the stream, till the point of end user. As a result, there is justification for a separate treatment of the two levies. IGST is levied under the IGST Act, 2017 and is collected, for convenience, at the customs point through the machinery under the Customs Act, 1962. The impugned notifications, therefore, cannot be faulted for arbitrariness or under classification.”

The court thus allowed the appeal and set aside the judgment of the Gujarat High Court.

Case Title: Union of India & Ors. vs Cosmo Films Ltd

Citation : 2023 LiveLaw (SC) 377

Counsel for the Appellant: Mr. B. Krishna Prasad, AOR Mr. Nikhil Jain, AOR Mr. Mukesh Kumar Maroria, AOR

Counsel for the Respondent: Mr. Mukesh Kumar Maroria, AOR M/S. Khaitan & Co., AOR Mr. Ajay Bhargava, Adv. Mr. Ayush Malhotra, Adv. Ms. Trishala Trivedi, Adv. Mr. Upkar Agrawal, Adv. Mr. Shamik Shirishbhai Sanjanwala, AOR Mr. Siddharth Srivastav, Adv. Mr. Abhishek A. Rastogi, Adv. Mr. Nikhil Jain, AOR Ms. Divya Jain, Adv. Mr. P. S. Sudheer, AOR Mr. Sudhanshu S. Choudhari, AOR

Foreign Trade Policy of 2015-2020 (FTP) : The Supreme Court has upheld the requirement of a ‘pre-import condition’ incorporated in the Foreign Trade Policy of 2015-2020 (FTP) and Handbook of Procedures 2015-2020 (HBP) to claim exemption of Integrated Goods and Services Tax (IGST) and GST Compensation Cess on inputs imported into India for manufacture of export goods, on the basis of ‘Advance Authorization’.

The bench set aside the judgment of the Gujarat High Court where it had quashed the amending Notifications, i.e., Notification No. 33 / 2015-20 and 79 / 2017-Customs, dated 13.10.2017, by which the Director General of Foreign Trade (DGFT) had imposed the ‘pre-import’ and ‘physical export’ conditions for availing IGST and Compensation Cess exemption on imports made under ‘Advance Authorisation’.

While holding that the concept of ‘pre-import condition’ was not alien, the court observed that paragraph 4.13 (i) of the FTP itself empowered the DGFT to impose ‘pre-import conditions’ on articles other than those specified in Appendix-4J of the HBP. The bench remarked that the Gujarat High Court had failed to consider the same and had erroneously proceeded on the assumption that only the goods specified in the said Appendix were subject to the ‘pre-import condition’.

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